What compound interest really means
Simple interest pays you on the principal only. Compound interest pays you on the principal plus all the interest you have already earned. The maths is exponential, not linear, and the effect takes years to feel. The first decade looks slow, the fourth decade looks unreal. This is why a 25-year-old paying £200 a month into a Stocks and Shares ISA ends up dramatically ahead of a 35-year-old paying £300 a month into the same fund.
£200 a month into a global tracker S&S ISA at 7% real returns from age 25 to 65 ends near £525,000, on £96,000 of contributions. Start at 35 instead and the same £200 a month ends near £244,000, on £72,000 of contributions. The ten-year head start, costing £24,000 more in contributions, was worth roughly £280,000 of extra retirement money.
Waiting until you ‘earn enough’ to start. The variable that matters most is not the pound amount; it is the number of years. £50 a month started today beats £500 a month started in five years.
A 60-second lesson on this, with a worked drill, lives inside the Finlo app. Free, forever, on the basics.